With-profit final bonus rates hit by market turmoil

The insurer has reduced the final bonus rates by up to 10%, with regular bonus rates and market value reductions remaining the same.

John Lister, chief actuary at Norwich Union, says the move is a direct result of falling values across equity markets, commercial property and corporate bonds since the beginning of 2008.

"We are taking responsible action to reflect the market movements over the past nine months,” he adds. “We need to ensure that those policyholders who leave the fund do not take more than their fair share at the expense of those customers who remain in the fund.”

The move comes just two months after the insurer decided to offer its investors cash payments of £1,000 if they agree to give up their rights any payouts from the inherited estates.

Norwich Union is currently in the process of writing to customers of its CGNU and CULAC funds offering them the payment. Customers who opt to receive the money are likely to see it reach their bank accounts during summer 2009.

“The problem with with-profits is that they tend to lag behind other investments, so they can look good while other parts of the market are struggling and then suddenly they collapse and bonuses are cut. This makes it hard for investors to get out in time.”

Several insurers, including Norwich Union, have recently reported a surge in with-profit sales, an unexpected occurrence that they attribute to this type of investment’s “smoothing effect” during times of market volatility.

However, Pitcher believes the resurgence is down to bad advice from financial advisers rather than increased consumer appetite.

“Advisers who are struggling to get their clients to make investments during this volatile time have been pointing to with-profit funds as good investments. Because they lag behind other investment areas, with-profit funds have appeared to look attractive – but this is bad advice.”

In fact, Pitcher says he is currently advising with-profit investors to get out now, and avoid the inevitable downturn.

“Norwich Union has slashed final bonuses already, and I expect others such as Prudential to do the same before too long. If investors leave now then they might be able to avoid seeing their final bonuses cut.”

A spokesman for Prudential says it has no plans to cut its final bonus. "We make bonus changes on an annual basis in February, and that's when are next one is scheduled," he adds. "We are not immune to market turmoil but our inheritance estate affords us some protection."

If you are a with-profit investor considering jumping ship, then there are a few points to consider first.

As Pitcher points out, higher rate taxpayers (or those close to the band) may find moving out of a with-profit fund could have tax implications and should take this into consideration before taking action.

Equally, investors aged over 65 should remember that their with-profit final bonus could impact their age related personal allowances.